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High level of profit warnings despite economy picking up

2 min read

28 April 2014

UK-quoted companies issued 74 profit warnings in the first quarter, the highest level since 2011, despite the economy performing better overall.

The strengthening pound and weakening emerging markets dominated profit warnings in the first quarter of the year, according to EY’s latest Profit Warnings report.

While domestic demand is improving, anxieties over emerging market economic performance, concerns over the strengthening pound and pricing pressures from cost-conscious customers continues to lower profit expectations.

The analysis shows that just over a quarter of warnings citing adverse exchange rates, against an average 3 per cent in the previous four quarters. Just shy of 20 per cent of companies cited “pressure on pricing” in their profit warning, compared with a five-year average of 6 per cent.

Companies in the FTSE 100, most exposed to emerging markets and with high foreign currency exposure, issued 14 warnings in Q1 2014 – more than at the height of the financial crisis. 

“The pace of UK profit warnings continued unabated in the first quarter of 2014, with expectations coming under pressure from a number of quarters,” says Keith McGregor, EY’s capital transformation leader for Europe, Middle East, India and Africa.

“The UK recovery remains in full swing, with vital global markets also growing. However, UK profit forecasts are still falling in response to growing pains in developing markets, the strengthening pound and pricing pressures closer to home.

“While the economic backdrop should continue to improve in 2014, it will be far from plain sailing for UK plc.”

He adds that businesses need to think carefully about capital needs and allocation over the next 12-18 months, and how they will achieve growth in this environment, either through efficiency savings or transactions.

“There will be more twists and turns as markets anticipate the first steps towards monetary policy normality in the UK and US. Low inflation may delay interest rate rises until mid-2015; however, central banks have a fine line to tread between supporting recovery and encouraging hubris. 

“This shifting capital landscape provides more options for investors and stakeholders, and companies will need to be operationally and financially fit to compete and capitalise on the recovery,” he concludes.